Wednesday, June 1, 2011

Why is the "Win-Win" approach so popular?

Scenario one:

You're entering a contract negotiation.  It's a one-time deal and you don't even like the people you're negotiating with, so all you want is to get the most value you possibly can out of the contract, which currently is open with respect to price and some term provisions.  In your preparations for the deal you've noted one provision in particular is worth $300,000 to your firm if you can get option A instead of B.  Having done your homework you're pretty sure the other side wants option B and that it's worth $450,000 to them.

What does your perfect deal look like?

Scenario two:

You're meeting with a potential customer for your product.  You don't like the buyer and for whatever reason know your firm will never do business with them again, so all you care about is maximizing your profit on the sale.  The product in question costs you $300,000 to make and from your research you're pretty sure that it's worth about $450,000 to them.

If the meeting goes well, will you sell it to them?

Most people consider the question in scenario two to be a no-brainer.  You obviously want to sell the product and the only question is how close to $450,000 you can set the price.  A lot of those people will envision the perfect deal in scenario one as having option A (the one that is worth $350K to their firm).  On a fundamental level, however, these are identical questions.  In both cases you have something that is worth $300,000 to you and 50% more to someone else and the question is who, ideally, should own it at the end of your discussion.  The difference is that in negotiations we think in terms of winning, which translates to getting our way and avoiding anything that imposes costs on us.  Business, on the other hand, is all about selling things that cost us less than they're worth to someone else; no one thinks they got beaten because someone bought their product.

Let's assume you got a deal with option A.  You and your counterparts are a combined $150,000 poorer than you should be.  For any possible deal with option A, you can make deals with option B that make each party better off.

Let's say the total value of the deal to you (with option A) is $1 million better than your BATNA.  Since you did such a good job and captured most of the value, the other side is only $400,000 better than their BATNA.  Now let's change the deal so that you get $375,000 more but they "win" on the provision and get option B.  Now the deal is worth $1,075,000 to you and $475,000 to them.  You didn't lose on the clause -- you sold it to them for more than it cost you to give it up.

The Win-Win approach to negotiations is popular for the same reason that businesses like to sell things.  If something is worth more to you than it is to me, you should end up with it.  If it's mine, I should sell it to you.  If it's yours, you should not sell it to me.  If it's part of a negotiation, it should end up going your way.  The key point is that you aren't giving it away; you're selling it for a gain.  You're making a concession in exchange for another concession that is worth more to you than what you gave up.

Most negotiations are about more than just price.  They include payment terms, guarantees, exclusivity periods, options to share upside, protection against downside, how disputes will be resolved, etc., etc.  Many of these issues are quite important to one or more parties but they are rarely equally important.  The win-win approach enables the parties to discover where things are valued differently and for the parties who value something the most to buy it from their counterparts.  This increases the value of the deal, often resulting in greater gains than could be accomplished by value capture alone.

One of my professors put it like this.  If you're negotiating with someone over how to divide a pile of money on a table would you rather that the table had one million dollars on it or ten million?  Good negotiators want the amount of money on the table to be as big as possible.  They certainly don't abandon value capture (and, indeed, there's no need to) but they know that it's a lot more fun to divide ten million dollars than one million.

We'll look at how to identify win-win opportunities and how not to sacrifice your value capture position in later posts...but for now, go back to scenario one.  Are you excited about "losing" your preferred option?  You should be.

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